Risks

The Group’s business and other risk factors that may potentially have significant influence on investment decisions are included below. With regards to the likelihood and the timing of the said risks arising and their impacts on the Company Group’s operating results if they do arise, those that cannot reasonably be predicted are not included. Meanwhile, in recognizing these latent risks, the Group is working to reduce risks by appointing executives in charge of risk management within the Company and its Group companies with the aim of avoiding risks and reducing risks in the event that any such risks arise, identifying risks facing the Group, and developing countermeasures for those risks. The Group continues to take appropriate measures by implementing various initiatives, such as having the internal audit department conduct audits of the effective functioning of the risk management system.
Only risks from general businesses are included below. This section contains forward-looking statements, of which are judged as of the submission date of the Securities Report (June 29, 2023)

The Group’s portfolio companies may become publicly traded, which will dilute the Group’s voting interests in these entities. In addition, the Group’s portfolio companies may from time to time need additional capital to achieve their growth strategy or other business objectives and may issue additional shares or other equity securities to meet their capital needs. The Group may choose not to, or be unable to, subscribe for the securities offered in any such additional issuances by its portfolio companies. If the Group fails to subscribe for additional securities of a portfolio company on a pro-rata basis to its existing shareholding in such a company, the equity interest in the portfolio company will be diluted.
A dilution in the Group’s equity interest in a portfolio company would reduce its share of the profits earned by such a portfolio company, which may have an adverse effect on its financial condition and results of operations. Further, if the Group’s ownership is reduced significantly, it may cause its representation on such company’s annual general meeting to be reduced, or otherwise reduce its ability to direct or influence the operations of that portfolio company.

Although the Company Group provides services through non-face-to-face channels such as Internet, and is committed to providing accurate and useful services and content, as well as a safe and secure usage environment, risks relating to information systems and security, including service delays or interruptions resulting from system faults, and damages on its assets or leaks of personal information resulting from improper access may cause loss of customers or liabilities for the compensation of damages may arise concerning the products and services of individual companies, which may impair the reputation of the SBI Group overall, and may have an adverse impact on its financial condition and results of operations.
In addition, it is essential to the growth of the SBI Group, that the Group continue to have deep familiarity with the Internet and its related technologies. As technical innovation continues in the Internet-related sector, the competitive landscape is being changed by the emergence of new technology and the entry into financial businesses by companies from other business sectors. The Group is engaged in the development of services that leverage new technology in FinTech, and the creation of new financial businesses. However, if the response to such new technology and new entrants is delayed, the services offered by the Group may become obsolete or may not adapt, which could lead to lower competitiveness within the sector. If the future response to a changing environment is delayed, it may have an adverse impact on the Group's financial condition and results of operations. Also, the Group’s response to major technical innovation may cause construction of a new framework or system development, et al., to bear heavy expenses. If this occurs, the Group's financial condition and results of operations may be adversely affected.

The Company Group's systems (including those of third parties such as subcontractors) are one of the most important elements of its business. Although we strive to prevent system failures, etc. through appropriate design and testing, and to implement security-conscious systems, we may not be able to completely prevent system failures, cyber attacks, unauthorized access, computer virus infection, human error, equipment failure, defects in the provision of services by third parties such as telecommunications carriers, new technologies, and inadequate response to new systems and means, etc. It is also possible that we may not be able to fully satisfy requests for enhanced system functionality to meet all business requirements or regulatory requirements arising from increasing regulatory scrutiny, or that the construction or updating of systems necessary to meet market or regulatory requirements may not be completed as planned due to the complexity of the work itself. In such cases, there is a possibility that the information and telecommunication systems may malfunction or become inadequate, resulting in transaction processing errors, delays or other failures, and information leakage, etc., which may result in the possibility of suspension of operations, the burden of compensation for damages and other losses, damage to the reputation or trust of the Group, being subject to administrative penalties, and incurring expenses to cope with these incidents.

The Group operates joint ventures and enters into alliances with foreign and domestic counterparties. The success of these operations is often dependent upon the financial and legal stability of its counterparties. If one of the counterparties with whom the Group operates a joint venture, or continues a business alliance with suffers a decline in its financial condition for any reason, or is subject to instability owing to a change to the laws governing its operations after an investment has been made in the joint venture or the business alliance, the Group may be unable to successfully operate the joint venture or alliance, or may be required to invest additional capital or cease operations altogether. Likewise, significant differences in corporate culture and business strategy between the Group and such partners may come to light, which may result in significant changes to the assumptions that the Group had made when deciding to enter into the joint venture or alliance. If the joint ventures or counterparties are unable to perform as expected, or if any unexpected events relating to the alliances occur, then the Group may be unable to continue those businesses successfully. The Group’s inability to successfully operate joint ventures or alliances may adversely affect its reputation and its financial condition, and results of operations.

As a result of the Group's business expansion and increasing name recognition, any assessment of a single Group company bearing the "SBI" brand can easily become an assessment of the entire Group. For this reason, the Company is carrying out initiatives towards the thorough and consistent management of the SBI brand, for the appropriate use of the brand at each Group company and preservation of the brand value. However, if the Group's overall brand is affected by a scandal, compliance violations including insider trading or a loss of trust from customers on any product, service, or customer support of a single Group company, it may have an adverse impact on the Group’s financial condition and the results of operations. In addition, the Group is vulnerable to poor market perception and reputational risk, since it operates in industries where integrity and the trust and confidence of its clients are of utmost importance. Negative publicity (whether justified or not) associated with the Group or any of the funds, products and services offered by it, and its officers or employees, partners or alliances, or the occurrence of any of the risks set out in this section may result in a loss of clients and/or mandates. The Group’s business operations are highly dependent on its officers, employees, partners, and/or alliances. The actions, misconduct, omissions, failures, or breaches of any of its officers or employees, partners and/or alliances may, by association, create negative publicity in relation to the Group. This may adversely affect the Group’s financial condition and results of operations.
In addition, if there are fraudulent persons or acts, which use trade names of the Group companies, the Group may be negatively affected by rumors regardless of lack of its fault. This may adversely affect the Group’s financial condition and results of operations.

As a “Strategic Business Innovator”, one of the Group’s basic policies involves working to perpetuate “Self-Evolution.”
In addition to business restructurings, the Group intends to aggressively pursue business expansion, including mergers and acquisitions (“M&A”) of businesses that it believes offer favorable synergies with its core businesses, however the Group may face the risk that its restructurings and business expansion activities may not produce the results that it expects. Failure to achieve expected results may have an adverse effect on the Group’s financial condition and results of operations.
The Group may not be able to identify suitable investment opportunities, partners, or acquisition candidates. Even if the Group identifies suitable investment opportunities, partners or acquisition candidates, it may be unable to negotiate terms that are commercially acceptable or complete those transactions at all. With respect to its acquisitions, the Group may have difficulty in integrating these companies or businesses, including internal operations, distribution networks, product lines, and personnel, with its existing business, and there is no assurance that the expected strategic benefits of any acquisitions or alliances will be realized. The acquired companies may have low margins and require significant reorganization to increase their efficiency, or the key personnel of an acquired company may decide not to cooperate in the partnership. The acquired company may involve a number of specific risks, including diversion of management’s attention, higher costs, unanticipated events or circumstances, legal liabilities, failure of the business of the acquired company, fall in value of investments, and impairment of goodwill and other acquired intangible assets, some or all of which may have an adverse effect on the Group’s business, financial condition and results of operations. In the event that the Group plans to acquire or invest in other companies, it may be required to obtain the prior approval of the relevant regulators and/or the government, and there can be no assurance that such approvals will be obtained in a timely manner, or at all. In addition, any acquisition of an overseas company will expose the Group to foreign exchange risks, foreign regulations applicable to its business, and different environments that it may not be familiar with. In the event that such risk arises, it may adversely affect the Group’s financial condition and results of operations.

Based on the management principle of “Endeavoring to Become a New Industry Creator,” the Group is aggressively creating and nurturing new businesses. If the new businesses are unable to achieve their business plans as originally formulated, and if they are unable to record earnings commensurate with their initial investments, such failure may have an adverse effect on the financial condition and results of operations of the Group. If the Group’s newly offered products or services have not been contemplated by existing laws and regulations or accounting standards, in order to verify the applicability and interpretation of these laws and regulations and standards, rapid business development may be restricted, and the Group’s financial condition and results of operations may be adversely affected. In addition, the new businesses may become subject to new laws and regulations, or be placed under the guidance of particular regulatory authorities. Any violations by the new businesses of the laws, regulations, or guidance that is applicable to them, and any administrative or legal actions directed at them, may impede the conduct of their operations, and have an adverse effect on the Group’s financial condition and results of operations.

The Company Group holds a large amount of investment securities, including investments in associates. Therefore, the Company could experience impairment losses on its investment securities as a result of declines in their value depending on stock market and bond market conditions (e.g., deterioration in the credit market, sudden increase in interest rates). Further, the Company Group also engages in lending to corporations and other entities, and depending on a variety of factors which may develop, the business and credit of the borrowers may deteriorate, which may require the Group to incur bad debt losses or make additional provisions for credit losses. In addition, conditions in the real estate market may result in additional credit loss provisions or losses on related receivables. Furthermore, the inability to pass on higher procurement costs to prices or a decrease in supply and demand for goods or services due to market conditions may result in a decrease in operating revenues, among other risks. Any of these factors could adversely affect the Group’s results of operations and financial condition.

The Group is exposed to litigation risk relating to the operations of its business segments on an ongoing basis. While the outcome of any pending or future litigation cannot be foreseen, given the inherent unpredictability of litigation, it is possible that an adverse outcome in any one or more matters may have an adverse effect on the Group’s financial condition and results of operations.

The Group is engaged in a wide range of financial services businesses both in Japan and overseas, with numerous financial institutions including securities firms, banks, and insurance companies within its members. As such, the Group continues to work to further strengthen its risk management and compliance systems with a view to ensuring the soundness of its finances and the appropriateness of its business procedures, and has established certain risk management and internal control systems and procedures.
Certain areas within the risk management and internal control systems may require constant monitoring, maintenance and continual improvements by the Group’s senior management and staff. If the efforts to maintain these systems are found to be ineffective or inadequate, the Group may be subject to sanctions or penalties, and its business prospects and reputation may be adversely affected.
The internal control system, no matter how sophisticated in design, still contains inherent limitations caused by misjudgment or fault. As such, there is no assurance that the risk management and internal control systems are adequate or effective notwithstanding the Group’s efforts, and any failure to address any internal control matters and other deficiencies may result in investigations and/or disciplinary actions, or even prosecution being taken against the Group and/or its employees, disruption to the risk management system, and an adverse effect on the Group’s financial condition and results of operations.

To prevent customers' interests from being unfairly impaired, the Company has prepared a policy on Management of Conflict of Interest to appropriately manage transactions that may cause conflicts of interest. In addition, for proper management, the Company has established a system necessary for appropriate management of conflicts of interest, including the implementation of internal training programs, etc., and strives to verify such system on a regular basis. Failure to identify and properly address conflicts of interest may result in penalties and administrative action, as well as damage to reputation and loss of customer trust, which may adversely affect the Group's business, the Group’s financial condition and results of operations.

The Group raises working capital through various means, including equity finance in the capital markets, loans from financial institutions, and issuances of corporate bonds. Owing to the global economic crisis and the resulting deterioration in the global credit markets, including reduced lending by financial institutions, the Group may face difficulty raising funds under favorable conditions, or at all. Also, if interest rates rise due to financial market conditions and central bank monetary policies in individual countries, or if the Group's credit rating is lowered, the Group's financing may be restricted, and its financing costs may rise. Any such events may adversely affect the Group’s financial condition and results of operations.

The Group utilizes derivative instruments to reduce investment portfolio price fluctuations, and to manage interest rate and foreign exchange rate risk. However, it may not be able to successfully manage its risks through the use of such derivatives. Counterparties may fail to honor the terms of their derivatives contracts with the Group. Alternatively, the Group’s ability to enter into derivative transactions may be adversely affected if its credit ratings are downgraded.
The Group may also suffer losses from trading activities, a part of which includes the use of derivative instruments, and as a result, its financial condition and results of operations may be adversely affected.

The Group depends in part on dividends, distributions and others from its subsidiaries and other entities, such as partnerships and other investee companies, to fund payments, including its debt obligations. Regulatory and other legal restrictions, including contractual restrictions, may limit the Group’s ability to transfer funds to or from the subsidiaries and other entities. Some of the subsidiaries and other entities which the Group depends on, in part, for payments are subject to laws and regulations that authorize regulatory bodies to block or reduce the flow of funds within the Group, or that prohibit such transfers altogether in certain circumstances. These laws and regulations may hinder the ability to access funds that the Group may need to make payments on its obligations, which may adversely affect the Group’s financial condition and results of operations.

The Group’s business operations depend on the leadership of the Company’s Representative Director, Yoshitaka Kitao, and other key members of the Group’s management team. If one or more of the key personnel of the current management team becomes unable to continue operating the Group’s businesses, such an event may adversely affect the Group’s financial condition and results of operations. Any remedial action adopted by management to deal with a loss of key personnel may not take effect immediately, or at all.

The Group’s businesses involve various types of intellectual property, including trademark rights, patents, copyrights, and other forms of intellectual property, particularly those related to the “SBI” brand. If it fails to sufficiently protect its intellectual property, or if it is unable to acquire the necessary licenses for the use of third-party intellectual property, the Group may experience difficulty in developing technologies or providing services. The Group may also become the subject of legal actions brought by third parties alleging infringement of their intellectual property. In addition, the Group may experience increased costs in connection with intellectual property, especially those related to patents. Such additional costs may have an adverse effect on its financial condition and results of operations.

Enactment of, or changes in, laws and regulations may affect the way that the Group conducts its business, and the products or services that it may offer in Japan or abroad. Such enactment or changes are unpredictable, and as a result of such enactment or changes, the Group’s business activities, financial condition and results of operations may be adversely affected.
Furthermore, enactment of, or changes in, accounting standards may have a significant effect on how the Group records and reports its financial condition and results of operations, even if the underlying business fundamentals remain the same. As a result of such enactment or changes, its business activities, financial condition and results of operations may be adversely affected.

Temporary differences arising between the financial statements and the tax basis of assets and liabilities are posted to deferred tax assets, using the statutory effective tax rate applied when the difference is resolved.
If there is a tax reform and change in the statutory effective tax rate, the Group may reduce or increase the deferred tax assets. Such events may adversely affect the Group’s financial condition and results of operations.
A valuation allowance is provided for deferred tax assets, if it is more likely than not that these items will either expire before the Group can realize their benefits, or that future deductibility is uncertain. Losses carried forward can be posted as deferred tax assets to the extent of the amount recoverable, and the Group posts deferred tax assets based on the assumption of recoverability.
Each Group company calculates the estimated future recoverable tax amount based on the expected amount of future taxable income. While the Group presumes that it is possible to realize the deferred tax assets after the valuation allowance, the amount of valuation allowance may fluctuate depending on changes in the expected amount of future taxable income. Such changes may adversely affect the Group’s financial condition and results of operations.

To manage operating risks, the Group companies may be covered by various insurance policies. However, there can be no assurance that all claims under such insurance policies will be honored fully, or on time. Furthermore, the Group is generally unable to insure against certain types of losses, including losses caused by earthquakes, typhoons, floods, wars, and riots, and does not have business interruption insurance. To the extent that any of its portfolio companies suffer a loss or damage that is not covered by insurance, or that exceeds the limit of its insurance coverage, the Group’s financial condition and results of operations and cash flows may be adversely affected.

A substantial portion of the Group’s assets, as well as its head office, are located in Japan and a substantial portion of the net assets are derived from its operations in Japan. The Group’s overseas operations are subject to the same or other disaster risks. Major disasters, riots, terrorist attacks, or other calamities affecting the Group’s business network in Japan or overseas, as well as outbreaks or spread of infectious diseases, could disrupt the Company’s business, even if they do not cause direct physical damage to its assets. In addition, conflicts or wars may occur in regions or countries where the Group invests or operates, which may cause damage to the assets of the Group or its portfolio companies. The Company Group's business, operating results, and financial conditions may be affected as a result of significant economic deterioration in the regions and countries affected by these disasters.
With regards to risks associated with COVID-19, which is spreading worldwide, there are concerns that restrictions on going out and requests to refrain from going out through the promotion of teleworking by companies, bans on overseas travel, and other restrictions may have broad impacts on economies and corporate activities in Japan and globally. Because the primary channel of the Group’s Financial Services business in Japan is the Internet and its face-to-face customer/sales activities are limited, it is less likely to be affected directly even when the spread of COVID-19 has prolonged impacts on society. Meanwhile, domestic and global investments may be affected directly by future fluctuations in uncertain economic conditions and drastic changes in stock and exchange market conditions. If the business environment and market conditions deteriorate in the future, the Group may post impairment losses on investment securities and other financial assets held by the Group.

The Group is actively investing and promoting business development in overseas countries, as such, the Group is exposed to risks relating to increasing cost or loss unique to overseas business, owing to factors that differ from those in Japan, such as systems including but not limited to laws and regulations, business practice, economic status, corporate culture, consumer attitude, and other related matters in the overseas countries. The Group conducts its investment and business development operations in the overseas countries upon careful investigation and examination, followed by appropriate measures to mitigate any related risks, however, events may occur that the Group could not initially foresee. In addition, countries in which the Group invests or operates may be subject to economic sanctions, and the existence of transactions related to such sanctions may affect the Group in terms of laws and regulations or worsening of reputations. In this case, these events may adversely affect the Group’s financial condition and results of operations.
Additionally, since the foreign shareholder ownership ratio of the Company remains high, it may be deemed that the Group is conducting financing activities in foreign countries, regardless of the Group’s intention. As a result, the Group may be affected by foreign laws and regulations, particularly those concerning investor protection, and this may cause the Group’s expenses to increase and restrict its business. Furthermore, the Group may increase foreign currency debt financing to hedge against foreign currency risks by borrowing from overseas financial institutions, or by issuing corporate bonds in overseas countries. Although the Group will conduct such financing upon careful investigation and examination of associated risk, events may nevertheless occur that the Group could not initially foresee, which may adversely affect the Group’s financial condition and results of operations.
Recently, in addition to the above, the application of various laws and regulations in overseas countries, where the Group’s overseas offices are located, including anti-corruption laws and regulations in the U.S. and the U.K., regulations related to economic sanctions from the competent authorities in individual countries, and the General Data Protection Regulation in the EU, might extend to the Group in other countries, including Japan. The Group has responded to a variety of these laws and regulations after carefully investigating or examining them not to violate such legal regulations, but there is a possibility that the Group may conflict with it when unexpected events occur or when necessary responses were inadequate. Such cases may adversely affect the Group’s financial condition and results of operations.

In order to preclude any transaction with a party that is suspected to have a relationship with an anti-social force, the Group has taken necessary measures with the objective of precluding all transactions with anti-social forces by, prior to entering into a new transaction, confirming whether any information with respect to a relationship with an anti-social force exists, and obtaining a representation and a letter in relation to the counterparty, of a pledge to the effect that the counterparty to the transaction is not an anti-social force. Furthermore, we have adopted measures against money-laundering and terrorism financing to ensure that the Group’s products and services are not used in these improper transactions. However, despite the Group’s strict investigations, there may be cases where the Group is not able to preclude a money-laundering transaction or a transaction with an anti-social force. If such a transaction is found, the cost for measures may accumulate, and the Group may be subject to a disposition or order by regulatory or other authorities, or its social reputation may be impaired. As a result, the Group's financial condition and the results of operations may be adversely affected.

While developing businesses both in Japan and overseas, the Group has appointed information security managers at each Group company in order to protect the information and assets of customers and the Group against growing cyber security threats. These managers are supported by the Group CSIRT under the supervision of the Company’s Group information security managers. In this way, we have established a framework to ensure the information security of the Group as a whole. Under this cooperative framework across the Group, we are promoting and continuously improving information security measures through organizational management, technological measures, human measures, and cooperation with external parties by referring to personal information protection standards established in JIS Q 15001 and information security management measures established in ISO/IEC 27001. However, in the event that a new human or system vulnerability is manifested and a cyberattack or information security incident occurs, personal information and confidential information may be damaged or leaked. Such damage may result in a deterioration of trust in the Group, a claim for damages from victims, and administrative actions by authorities, adversely affect the Group’s financial condition and the results of operations.

The Company Group is required to handle customer and personal information appropriately in accordance with domestic and foreign laws and regulations. The Group holds a large amount of customer and personal information and has established regulations and systems for the storage and handling of such information and is working to sophisticate its management system. However, the Company may not be able to completely prevent the loss or leakage of customer or personal information due to improper management, cyber-attacks or other unauthorized access from outside the Company, or infection by computer viruses. In such cases, we may be subject to penalties or administrative actions, and may also incur direct losses, such as compensation for damages to customers. In addition, the Group's business performance and financial position may be adversely affected by loss of customer trust, and additional costs may be incurred to deal with these events.

Against the backdrop of the emergence of social issues such as human rights, economic inequality, and food problems, as well as environmental issues such as climate change and resource problems, society's attention and interest in ESG (Environment, Social, and Governance) management has been growing. Based on this recognition, the Company Group has established Sustainability Committee to discuss, decide, and manage sustainability measures as part of the Group's management strategy, and the Sustainability Promotion Office, which serves as the secretariat of the Sustainability Committee and promotes and implements each measures on a group-wide basis.
However, although the Company Group intends to establish such system to appropriately manage its efforts to solve environmental and social issues, including climate change, and to ensure further effectiveness of its measures, if stakeholders determine that the Group’s management structure and business activities are insufficiently addressing ESG issues, the Group's reputation may be damaged, which may affect fund procurement, recruitment of human resources, and other activities. In addition, inadequate ESG initiatives at the Group's investee companies could have a negative impact on the business performance and financial position of the Company Group due to a decline in the corporate value or deterioration in the credit standing of the investee companies.